Beyond capital: Bringing operational efficiencies to SMEs
Having evaluated, built and exited businesses in the past, I can say with a great deal of confidence that capital, however critical it may be in the business of growth, in itself cannot build companies.
As a PE operating consultant for several companies in the past, I have come to realise that financial acumen and domain expertise can take an SME only so far – it needs to be layered with a richer, more vibrant system to transform into a larger organisation.
In economies like ours, it is no secret that SMEs will grow faster than the sectors in which they operate. With millions of SMEs in the country, only a few of them will get the opportunity to get listed in the newly-formed SME Exchange, and see value-creation through a listed route, with strategic investments coming from a PE/ VC/ HNI route. What about the rest? Where do they stand?
But I’m already jumping ahead. I may be prudent to rewind a bit.
All SMEs start off at the same level. There is always a smart, dynamic entrepreneur whose vision of a better world lays the foundation of an organisation of the future. Few stumble along the way, but some move beyond their comfort areas to scale up. What is it that they do during their initial years that gives them an edge?
There aren’t any straight answers to this question. While the reasons may be multi-fold, one of the most fundamental facts behind an SME’s transformation is its ability to scale its operations to a high level of efficiency.
It’s no secret that successful companies are those that are led by promoters who are superlative individual performers in their domain of expertise. What makes them great is their ability to see the larger. These individuals are capable of harnessing long-term performances via their ability to forge efficient collaborations. But still, how does this translate into operational efficiency?
Let’s see how they began. These brilliant promoters and entrepreneurs incubated their companies with a handful of talent, largely focused on value-creation through domain knowledge, skills and expertise in their area of functioning. This obviously worked for a while. The first product got launched, the first customers came, the first ‘level-up’ also happened. And maybe some more. But soon, it isn’t enough. Business tends to stagnate – and it’s not just revenue that takes a hit. If an entrepreneur doesn’t innovate in thought and action, his growth stops, and that dream remains unrealised and the idea doesn’t see its potential maximised.
So, where does the challenge lie? Realistically speaking, to achieve growth, SMEs have to work around a few familiar road blocks. The most relevant ones include knowing how to retain talent, how to create an organisation for the long run, and how to build processes that help scale the company to its next stage and beyond.
This isn’t easy. Efforts at building Human Capital and Organisational Know-how don’t necessarily come naturally to these entrepreneurs. There is always intent, but is often challenged by content. I believe that the one sure-shot way of achieving these goals is to make sure that entrepreneurs actively seek quality input from operational consultants, often found in many PE funds that today are seeking to move away from providing just passive capital, to actively participating in the organisation’s growth process.
Whichever way, the growth of SMEs in our macro environment is a given, but the pace will be determined by rapid adoption of active capital, rather than just filling their coffers with money.
(Mohit Ralhan is Managing Partner, Indus Balaji Private Equity)
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